‘Rainy Day’ Funds Putting States in Black

Five years ago, the governor of Michigan twice brought a statewide television audience gloomy news of massive cuts in state spending--”beyond fat and into bone,” he said. He predicted that tough times lay ahead.

Today, that heavily industrialized state has a “rainy day” fund of $366 million and Treasurer Robert A. Bowman recently declared that “no state is as fiscally secure as Michigan.”

Just two years ago in Ohio, state officials were worried about a deficit of $528 million and hoped a 50% increase in taxes would correct it.

Today, Ohio is trying to decide how to spend its bounty--a $297-million surplus.

Large Surpluses

For the first time in half a decade of precarious budget-balancing acts, Michigan, Ohio and a growing number of other states are finding themselves flush with large surpluses. In all, 23 states had surpluses of 5% or more of their annual budgets--the level considered healthy by Wall Street bond analysts.

The “rainy day” accounts created by 27 states to help shield them from economic downturns doubled during the fiscal year that just ended, according to a joint study by the National Assn. of State Budget Officers and the National Governors’ Assn.

Now, the big question in state capitols from Maryland to California has become: where--and whether--to spend?

Michigan’s fiscal turnaround means roads are being repaired faster than they are deteriorating and there may be more money for education.

“The time to fix the roof is when the sun is shining,” said Bowman, the state treasurer. But, he added: “The fact that there is a dollar doesn’t mean we have to spend it. Our biggest problem is how to combat the cyclical economy.”

Fresh memories of those deficit-ridden years--and of the flourishing economy that preceded them--have kept states from going on spending sprees. The “rainy day” funds, created to protect states from downturns, are a result of those memories, and more states are considering adopting such reserves.

Virtually all of California’s $1.1-billion surplus will go into reserve as protection against a weakened economy, according to Wallace C. Chan, assistant deputy controller.

More Education Spending

In Ohio, William J. Shkurti, director of the Office for Budget Management, said, “We’ve come a long way since our bad times.” Ohio cut $1 billion in education programs at one point but now has a $125-million “rainy day” fund. Most of Ohio’s surplus this year will go back into education, he added.

Illinois, which cut 4,000 persons from its payroll in 1983 because of fiscal problems, has begun hiring again. It is also spending $68 million on education, more than half of that on reading-improvement programs.

“The most important thing is to spend it wisely,” Don H. Schaefer, spokesman for the state comptroller in Illinois, said. There has been pressure from the General Assembly to spend more of Illinois’ $479-million surplus, the highest in state history, but Schaefer notes that the surplus “only translates into 14 days of cash.”

A return to financial stability brings renewed pressure from lobbyists and legislators to pour money into education and human services programs trimmed or eliminated during the last few years.

‘Give It Back to Us’

“The people are saying, ‘Well, you’ve got all this dough, why don’t you give it back to us,’ ” said B. J. Rudman of the Massachusetts state finance office. “The truth is that, in the long run, a surplus can be an illusion.”

Massachusetts estimates a surplus this year of $91 million, in addition to the $20-million surplus in 1984. “We’ve come a long way, but the economy will slow again,” Rudman said.

Meanwhile, a significant number of states have not pulled out of their tailspins. In the plains, where the farm economy has yet to improve, and in the Northwest, where the timber and mining industries have fared poorly, states have posted little, if any, surplus.

The reserve funds of other states remain small, compared to the years before the most recent recession, according to the survey by the governors’ association. States still have less than half the reserves they once held, the survey indicated, and, in fiscal 1985, about half of all the money in reserve was in the coffers of only four states--California, New Jersey, Minnesota and Wisconsin.

Frugal Budgeting Cited

State budget officers and fiscal analysts attribute the improved health of many states to frugal budgeting, higher taxes and an improved economy. Also, states that had trouble meeting their budgets in 1983 and 1984 were inclined to underestimate the strength of the recovery in 1985, according to Cathy D. Macsherry, senior vice president at Standard and Poors.

“There was conservative revenue forecasting; the states did not anticipate such economic growth,” Macsherry said.

Now, with economists forecasting a slowdown and the federal government out to reduce its own deficit, states remain cautious. The trend toward growing surpluses may be over, state budget directors say.

“The surpluses will come down again,” said Frank Russek, an analyst at the Congressional Budget Office. He cites slower growth in state revenue, reductions in some state taxes and cutbacks in federal aid.

Surpluses to Fall

Corina L. Eckl, a senior research analyst for the National Conference of State Legislatures, points out that “one- and two-year tax increases are ending. A lot of things will be changing in the next few years.” The conference estimates that the $8.8-billion surplus for all 50 states this year will fall to $6.9 billion next year.

The Reagan Administration’s recent attempt to slash 10% of the $100 billion that state and local governments have come to expect annually from Washington has caused concern. Although Congress did not approve most of those cuts, it did decide to end general revenue sharing, a $4.6-billion program, in 1987.

Maryland Comptroller Louis L. Goldstein, currently riding his state’s $20-million surplus, is not alone in worrying that the good times for state budgets may be over.

“We just have to hope for the best,” he said.